Question 1 Which of the following is the best example of a positive externality?

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Question 1

Which of the following is the best example of a positive externality?

A car company lays off 10,000 employees in order to cut costs.

An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere.

An individual smokes in a restaurant, which bothers other patrons.

A child is vaccinated against a disease, which reduces the probability that other children will catch the disease.

4 points

Question 2

As a result of a negative externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. As a result of a positive externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity.

high; high.

low; low.

high; low.

low; high.

4 points

Question 3

Based on the diagram below, the deadweight loss area associated with the market equilibrium equals:

$10

$50

$80

$1,000

4 points

Question 4

A firm's accounting profit is given by total revenue:

less implicit costs.

less explicit costs.

less economic profit.

less implicit and explicit costs.

4 points

Question 5

Suppose an activity has a private cost equal to $30 and a private benefit equal to $30. The associated social cost equals $35 and the social benefit equals $30. Which of the following statements is true about this activity?

There is a negative externality associated with this activity but not a positive externality.

There is a positive externality associated with this activity but not a negative externality.

There is both a positive and a negative externality associated with this activity.

There is neither a positive nor a negative externality associated with this activity.

4 points

Question 6

The Coase Theorem implies that:

the efficient level of an externality is generally zero.

private individuals living in market economies should not be concerned with externalities.

government intervention is not always needed to arrive at the efficient level of an externality.

government laws are unnecessary.

4 points

Question 7

An industry in which a small number of large firms sell products that are either close or perfect substitutes is:

perfectly competitive.

monopolistically competitive.

an oligopoly.

a monopoly.

4 points

Question 8

When a negative externality is present in a market:

a tax can increase the level of economic surplus.

the social benefits are greater than the private benefits.

there is generally too little of the good produced by private markets.

the government should ensure that there are zero external costs associated in all markets.

4 points

Question 9

In the presence of a positive externality, the government can arrive at the socially optimal output level by:

paying producers a subsidy equal to the amount of social benefits associated with the activity.

charging producers a tax equal to the amount of social costs associated with the activity.

paying producers a subsidy equal to the amount of external benefits associated with the activity.

charging producers a tax equal to the amount of external costs associated with the activity.

4 points

Question 10

The tragedy of the commons is that:

too few individuals have access to high quality healthcare.

common people overconsume public goods.

the quality of life for lower income people is generally lower than that of higher income people.

a resource with no price tends to be exploited until its marginal benefit falls to zero.

4 points

Question 11

One potential remedy to the tragedy of the commons is to:

never allow a single individual to consume more than one percent of the common resource.

criminalize the usage of common resources.

allow individuals to use a common resource as long as they receive some benefit from doing so.

place a common resource under private ownership.

4 points

Question 12

As a result of a positional externality:

contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement.

there is generally an underinvestment in performance enhancement.

the market price of performance enhancement materials is too high.

the quality of performance in competitive situations is lower than the socially optimal level.

4 points

Question 13

Which of the following statements is true regarding health insurance?

Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless.

Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs.

Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services.

First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II.

4 points

Question 14

A strategy that yields a higher payoff no matter what the other players in the game choose is known as a:

prisoner's strategy.

dominated strategy.

dominant strategy.

Nash strategy.

4 points

Question 15

Based on the diagram below, if the costs of hospital care are constant at $200 per day, and the individual does not incur any cost for each day for hospital care, then:

the individual will stay 7 days and there will be no loss in economic surplus.

the individual will stay 3 days and there will be no loss in economic surplus.

the individual will stay 7 days and there will be lost economic surplus.

the individual will stay 3 days and there will be lost economic surplus.

4 points

Question 16

Economic research by Manning and colleagues suggests that people with deductible health insurance policies:

spend substantially less on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage.

spend substantially more on health care and have substantially better health outcomes compared to people with first-dollar insurance coverage.

spend basically the same amount on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage.

spend substantially less on health care and have no measurable difference in health outcomes compared to people with first-dollar insurance coverage.

4 points

Question 17

An efficient program for reducing pollution is one for which:

all polluters incur the same total costs of abatement.

all polluters pay the same amount in taxes to the government.

all polluters have the same marginal costs of abatement.

all polluters reduce their emissions by the same amount.

4 points

Question 18

Given the information on pollution abatement costs of the two firms shown below, which of the following is an efficient combination of pollution reduction?

Quantity of pollution abatement

Firm A's MC of abatement

Firm B's MC of abatement

1

$30

$25

2

$35

$30

3

$40

$35

4

$45

$40

Firm A reduces by 1 ton and Firm B reduces by 1 ton.

Firm A reduces by 2 tons and Firm B reduces by 3 tons.

Firm A reduces by 4 tons and Firm B reduces by 1 ton.

Firm A reduces by 3 tons and Firm B reduces by 2 tons.

4 points

Question 19

All of the following are characteristics of perfectly competitive markets except:

there are a large number of firms.

productive resources are mobile.

all firms produce a differentiated product.

buyers and sellers are well informed.

4 points

Question 20

An advantage of the auction method to pollution abatement is that:

it is very expensive to firms.

regulators can achieve a desired abatement target without having detailed knowledge of the abatement technologies available to polluters.

it requires all firms to reduce by exactly the same amount.

it assures that eventually society will reach a level of zero pollution emissions.

4 points

Question 21

There are 2 firms each emitting 200 tons of a pollutant. Firm A's abatement costs are constant at $20/ton, and Firm B's abatement costs are constant at $40/ton. The government's goal is to reduce pollution by half. If the government auctions 200 one ton permits to the highest bidder:

Firm A will purchase all 200 permits.

Firm B will purchase all 200 permits.

each firm will buy 100 tons.

there is no way to know who the highest bidder for any permit would equal.

4 points

Question 22

As a result of economies of scale, as output expands:

fixed costs are decreasing.

average total costs are decreasing.

marginal costs are increasing.

total costs are decreasing.

4 points

Question 23

Generally, when countries open their borders to free trade:

both domestic producers and consumers of imported goods gain.

both domestic producers and consumers of exported goods gain.

domestic producers of imported goods and domestic consumers of exported goods gain.

domestic producers of exported goods and domestic consumers of imported goods gain.

4 points

Question 24

Which of the following is the best example of a tariff?

South Korea bans imports of U.S. beef because of safety concerns.

The U.S. requires toys imported from China to undergo testing for lead content.

The U.S. imposes a tax on sugar imported from Brazil.

The U.S. restricts the quantity of cars imported from Japan.

4 points

Question 25

A means-tested program is a benefit program:

in which benefits decline as a recipient's earned income increases.

in which all individuals must undergo health screening to be eligible for benefits.

in which all recipients exclusively receive benefits through in-kind transfers.

that only affects the average income of a specific segment of the population.

4 points

Save and Submit

Click Save and Submit to save and submit. Click Save All Answers to save all answers.

A car company lays off 10,000 employees in order to cut costs.

An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere.

An individual smokes in a restaurant, which bothers other patrons.

A child is vaccinated against a disease, which reduces the probability that other children will catch the disease.

Explanation / Answer

Answer 1:

Option D. A positive externality is the one that provides benefit to the third part not directly involved in the market concerned. If a child id immunized, others also have a less chance of getting infected by the disease.

Answer 2:

Option C. In the case of negative externality, private equilibrium is too high compared to social optimum as the commodity will be over produced as Marginal social cost is not taken into consideration. The opposite happens in case of positive externality as Marginal Benefit to the society is not considered.

Answer 3:

Deadweight loss = 1/2 * (50 - 40) * (80 - 70 ) = 100 / 2 = $50.

Answer 4:

Option B. Accounting profit only considers explicit cost and not implicit cost.

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